Chinese Government Now Fretting about Auto Industry

Commercial Vehicle Overcapacity at Catastrophic Levels.

Overcapacity weakened the US auto industry before the Financial Crisis, and destroyed it during the crisis, with two of the Big Three automakers, some of the biggest component makers, and numerous smaller component makers going bankrupt. It was during the bankruptcy process that the industry restructured, laid of hundreds of thousands of people, shuttered and shed plants, mauled creditors, destroyed stockholders, and finally got rid of overcapacity.

Overcapacity is devastating to the industry, employees, investors, and creditors. But it feels good on the way up.

And now the Chinese auto industry has that problem. The automakers active in China, including all global brands, have had no patience with doubters, and announcements of new assembly plants being built in different parts of China became a near weekly ritual.

China went from automotive backwater to the largest auto market in the world, blowing past the US in the process, within a decade. Last year, 24.6 million vehicles were sold in China, and no one was going to stop this blistering rate of growth, not even the slowing economy.

The industry has become a huge contributor to the Chinese economy, not only in manufacturing, but also investment (building and equipping plants, dealerships, distribution infrastructure, etc.), services such as finance and insurance, transportation (hauling 24.6 million vehicles across China), etc. It’s for this reason that the industry is sacred.

So when sales began to sag last year, the government threw all kinds of subsidies at it to keep growth alive no matter what, and sales perked up again. In the first four months this year, sales rose 6.1% compared to the same period in 2015, a far cry from the double-digit growth of prior years.

Yet automakers kept building plants, and production capacity kept soaring far faster than sales. By last year, China had the capacity to build 31.2 million vehicles. And idle capacity – the bane of the industry – is now rising; and in the case of commercial vehicles, an indicator for the good-producing economy, overcapacity is soaring.

It’s getting so serious that it isn’t just some wayward bloggers pointing it out, against momentous industry hype and promises, but the Chinese government via its National Development and Reform Commission (NDRC) and the China Association of Automobile Manufacturers CAAM). According to Reuters, they made their concerns known in a joint statement at a press conference in Beijing.

New assembly plants in the pipeline will add another 6 million units in production capacity, they explained. With this, production capacity will rise to 37.2 million units.

Passenger vehicle capacity is currently running at what it termed a “relatively reasonable” 81% utilization rate, while for commercial vehicle production, capacity utilization has already plunged to a catastrophic 52%.

They jointly warned that the overcapacity problem will worsen. The plants currently under construction were planned back in the day when auto sales in China were still soaring at double-digit rates, and a slowdown simply wasn’t part of the scenario.

The NDRC and CAAM statement warned that the auto industry, as Reuters put it, “must strengthen development and commercialization of new products and technologies.” The industry must also raise production capacity utilization, that is lower overcapacity, which is the hard part, because they would have to sell more vehicles or remove some production capacity. And they must “launch cooperation in international production,” whatever that means, perhaps boosting exports, which have been crashing for the past few years.

The statement direct industry players what to do to “avoid a production glut,” as Reuters put it, though “avoid” may be a misnomer and hopelessly optimistic word since the “production glut” is already building:

“First, as commercial vehicle capacity utilization is low, it is not appropriate to blindly increase investments in production capacity,” the two bodies said.

“Secondly, investment in the battery space is hot, while companies are fragmented and technology and development levels are uneven. We must guard against low-level redundant investments.”

This sort of structural overcapacity runs up the supply chain, impacting plants from automakers down to the smallest component maker. It doesn’t go away on its own, unless sales suddenly begin to soar even faster than capacity additions. And the catastrophic overcapacity in the commercial vehicle sector points at deeper problems, in that these companies have totally overestimated the growth of China’s goods-producing and transportation-based economy. And that’s another data point for the hard-landing gurus.

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31 comments for “Chinese Government Now Fretting about Auto Industry”

Chris

May 13, 2016 at 4:50 pm

Market distortion is a predictable consequence of artificially cheap credit. This is but one of many industries in China that suffers from over capacity. They have virtually vacant cities – talk about over capacity. China is the production and consumption engine that drove global growth but the time has come for them, and everyone else, to pay the piper.

Bigfoot

May 14, 2016 at 8:19 am

This article & your last question brings up a number of issues . I don’t think we can look at Chinas automotive industry in the singular way it is mostly presented here. We have to examine the interconnections to get a better picture.

How many of the auto/truck plants in China are joint ventures with manufacturers from other countries? (no stats but it’s huge) I’m just looking at the dominoes associated with connectivity. We know GM, Ford, Daimler, Toyota, Nissan, Honda, Kia & a few other auto makers have joint ventures there & their vehicles seem to have the greatest percentage of the market share. Volkswagen has a huge stake in China. Just a few years back, Volkswagen sales in China represented about 1/3 of their global market & sales were 3+ million for the year. Let that sink in for a minute.

Foreign companies through the required joint ventures have largely taken over Chinas market share while simultaneously Chinas domestic automakers (over 100) have continued to lose sales on the home-front. A great deal of Chinas domestic production goes to BRIc’s & other developing countries outside China. Lets not forget that the vast majority of Chinese companies involved with foreign joint ventures are SOE’s, not truly independent companies. The majority of Chinas domestic manufacturers are SOE’s as well. This will make a difference down the road on both the financial & political fronts but I’m not sure what the most likely outcomes will be.

There is a sizable import black market regarding foreign cars coming to China. This has been created due to the huge markups & tariffs associated with importing there.

Used car sales are another big issue. They have represented a small part of the pie in the recent past but that segment is growing rapidly & is starting to make a dent in new car sales there as well.

Much has been said about China stealing technology, & they do. Please don’t forget that within these joint ventures (not just automotive) with foreign companies, these foreigners are required to share all their data. I believe for the most part, the foreign technologies has been given away to China in exchange for cheap labor.

The realities are the world economies are too heavily entwined. Together we are racing down the road towards the cliff. There is too much inertia to make a soft landing. The recession/depression will encompass the entire world. Put on your splat suit!

d

May 14, 2016 at 9:26 am

One of the Issues in china regarding VW.

They committed to building several new plants, they then deduced that the market had reached already.

The Overcapacity situation, that exists everywhere else on the planet.

So trying to be good green Germans, they went to the chinese and said, look there is overcapacity we have no need of these plants. We want to cancel them, and build something that may be needed there.

They were rejected, violently, by the chinese, and told if they did not honour their commitments to build and open the plants they would be ejected from the chinese market.

Other Auto manufactures in china, have had similar issues/Stories unofficially..

The chinese are also developing their clone manufacturers to steal the industry from the foreign company’s.

I believe china intends to do with its Auto overcapacity what it has been doing with its general industrial overcapacity (shoes underwear Etc) for over 20 years .

Destroy the businesses of foreign producers, in those industry’s.

In china “commercial competition” means to destroy your competitor, for ever, by what ever means. This applies locally, as well as internationally.

You must understand what the chinese mean when they use the European word “Competition”:.

Fair and level playing fields, along with consumer benefits, are not in the chinese concept of “Competition”

Bigfoot

May 14, 2016 at 10:00 am

Thanks for the input d. I agree with. The foreigners setting up shop in China have been blinded by their greed & lust for a quick profit. – Sun Tzu

MC

May 13, 2016 at 5:34 pm

A few years back I warned Western, Korean and Japanese automakers were killing the goose that laid the golden eggs with China. They piled up on it too quickly and bet on growth figures that could only be sustained for a brief timespan to last for decades.

This is not the first time that happened. I have a good friends who owns a Honda motorcycle dealership in Italy. When the euro kicked in and interest rates on loans plummeted, sales started to skyrocket, increasing by over 30% year on year between 2002 and 2007.
As such, Honda rapidly changed its business model, from a mixture of models, to a lineup very concentrated on low-mid level models to be sold on credit.
The problem with these models is that margins for dealerships were rice paper thin and there was no strict pricing policy in place, leading to a furious “bidding war” which often led dealerships to sell at a profit as minuscule as Amazon’s.
In 2005 my good friend took part to a meeting among dealerships in which many (himself included) raised concerns about the sustainability of this model. Many dealers were old enough to remember times of lean cows and questioned an approach based on volume instead of the old mixed system, when selling a couple high end, high margin motorcycles in lean times could help a dealership stay afloat.
They were assured the then economic climate was stable enough to sustain 30% yearly growth figures “for at least a decade”. Two years later the market peaked and in 2008 all heck broke lose.

The Chinese car market, for different reasons, has long reminded me of this particular situation. Carmakers have been lulling themselves to sleep with the idea that China will not just keep on buying cars, but do so at an ever accelerating pace for decades to come.
In doing so, they added capacity at breakneck speed, and not just in China: China is the prime market (over 40% production) for the BMW 7-series luxury sedan, which is exclusively assembled in Bavaria, at Dingolfing. BMW plans to build at very least 50.000 new 7-series per year and expects the percentage of these cars to be shipped to China to grow to at least 50% of the total. These are pretty serious numbers for such an expensive car which faces not just a slowing Chinese market but stiff competition both from other German manufacturers and foreign companies such as Toyota.

Commercial vehicles are another matter completely: they are downright scary worldwide, not just in China.
There’s something seriously, seriously wrong when people buy cars like there’s no tomorrow but companies don’t buy lorries, vans and trucks. This is unlike anything I’ve ever seen.

Mick

May 13, 2016 at 7:12 pm

What’s really going on here:
This won’t be a popular post or believed, until it occurs of course.

China is creating overcapacity so it can replace the US capacity when the war begins and America is all but annihilated.

Her factories and production will be taken off line, probably for good, replaced by China and India.

Laugh if you will, but while laughing, ask yourself why China has spent billions building a military base in the South Pacific.
Or why Russia has done the same in Crimea.
Super powers are not in the habit of building new military bases for no particular reason.

NotSoSure

May 13, 2016 at 7:23 pm

China alone can’t beat the US, it will simply expose the Ponzi nature of both economies. BUT Russia and China combined is just too frightening to think about. The worse thing is that the neocons in Washington is always looking for a fight with Putin e.g. the whole Crimea debacle.

In the end it’s the same story. If the Trump motto is: “if you have a wall, everything looks like Mexico” then the current economic thinking from the neocons is: “If WWII made us a superpower, then well all we need to restore America is another World War.” God help us all.

ANON

May 14, 2016 at 10:31 am

Not so sure about the world war. :)
Same as with any other narrative, it is promises which get things done and reinforce any collective story. The promises of the current narrative cannot apply to a narrative promising all will be back on track if only we collectively kick the other guys’ collective nuts. For collective nut kicking, another narrative is needed (ex: it is fault for ruining our nice story and the path to Nirvana), as well as another set of promises (ex: war bonds) supposedly to be kept as soon as the nut kicking is successful.
When the current promises are broken, the narrative crumbles along , which leads the extraordinary popular delusion straight into to the madness of crowds (disorganized nut kicking).
At least that’s what history seems to imply. Sorry if this may be considered off topic, IMHO it is not, because I consider finance as a system of promises (of more) which keep the narrative (economy) humming along.

Yeah, but the US has military bases all over the world, including at China’s doorstep (Korea, Japan), and around much of Russia.

NotSoSure

May 14, 2016 at 9:02 am

Sure and it’s never won a major war for quite some time already. The moment the US withdraws from Iraq/Afghanistan, it will be like as if the US has never come.

It took billions of dollars to hunt down a man with a beard.

And in WWII, the Russians won the European theater, but their contributions have always been diminished by American historians. The US moment of glory was only in the Asian theater, against a country much smaller.

And remember Vietnam, still gives me a headache. Recently I took a trip to the country and visited a couple of museums where American brutality was in full display. After that, and we still lost? Gives me an even bigger headache. But at least it gave us Agent Orange with its fruity taste right :)

The US military is not weak, but its strength is also overrated. In a non nuclear direct ground confrontation, I think the Russians will win, especially if it’s during winter.

Winston

May 14, 2016 at 9:33 am

Thanks to nuclear arsenals Mutual Assured Destruction still holds true as much as it ever has and economic ties between the potential major power combatants have never been greater, far, FAR greater than they were during Cold War v1.0. At most, there might be minor skirmishes.

Wars between smaller states are more likely in the event of a worldwide economic collapse.

nick kelly

May 13, 2016 at 8:31 pm

Since you mention a military base I gather when you refer to America’s annihilation you mean its military destruction.
No current serious military publication puts the Chinese military on anything like par with the US. Yes the Chinese have launched an aircraft carrier a former Soviet one they bought with the usual “I am over 21 and will not use it for military purpose’
It was going to be a floating casino- but now it’s refurbished and has had planes land on it.
No doubt this popped a few champagne corks at the Pentagon because it has to justify its 13 fleet aircraft carrier battle groups.
But in so many areas: avionics, radar, satellites, and nuclear submarines etc. etc. China is 10-20 years behind.
The PLA is basically a bunch of mouths to feed- China would love to reduce its size further but it is connected at the hip with the CCP.

Militarily Russia does have a nuclear deterrent- its problem is that it looks like going bankrupt at the present rate.

NotSoSure

May 14, 2016 at 9:07 am

Remember the US at the advent of WWII? I think its military was ranked only 19th in the world? It even had less soldiers than Portugal.

I am not going to argue that the Chinese is even close to the US in terms of technology, but again in a non nuclear confrontation, they can always throw people ala the Korean theater. The Chinese were EVEN more behind back then.

But I’ll admit, in the end probably no one will win since all of them will simply resort to pressing a couple of buttons to settle the issue.

bead

May 14, 2016 at 9:21 am

The Chinese can throw people if the U.S. military is as brain dead as they were near the Chinese border in 1950.

Earl Smith

May 14, 2016 at 1:08 pm

I remember an analysis of the opposition at submarine school back in the 1960s.

We could defeat a Soviet sub 20:1 against their diesels, down to 4:1 for their best nukes. All very Rah Rah and patriotic. Until the final analysis was made. After all the losses with the exchange rate lopsided in our favor when the totals were tabulated, we would be out of submarines and the Soviets would have enough submarines left over to sink our entire carrier fleet and support ships and put all the troop ships that we would use to protect Europe on the bottom of the Atlantic. Our current naval planning is for the US submarine force to be smaller in 2025 than we had submarines based at Manila at the start of WW2. And it takes 4 years to construct a submarine — longer than ww2 lasted for us.

As Stalin is quoted as saying Quantity has a quality all its own.
(and which we acknowledged in WW2 by building lots of inferior Sherman tanks that were nicknamed “Ronsons”, because of their tendency to catch fire, to attack the German Panzers.)

An do not forget that the French had more tanks than the Germans in May 1940 as well as what was acknowledge worldwide as the best tanks. Not that it did them much good.

d

May 14, 2016 at 6:51 pm

“Sherman tanks that were nicknamed “Ronsons”,”

Germans called the “Tommy Cooker’s”.

Bigfoot

May 13, 2016 at 8:35 pm

Anything is plausible, your theory included. I think it would end up in a MAD event though if it came to conventional warfare. China needs Russian energy. Russia & China are both active in the Artic.China has been locking up resources all over the planet for some time & they see the need for more military might to ensure access to those resources.

I’ve been looking at a lot of global trade data lately. When you go item by item, country by country, it really sinks in how globally connected we all are. I believe it would be extremely difficult for most countries to move to an isolationist stance without major ramifications. We are all linked whether we like it or not.

I believe the warfare will be more clandestine. Cyber warfare (power grid &various control mechanisms), FX warfare, & other financial warfare. The apparent ongoing efforts to establish new trading exchanges & the accumulation of gold by R & C does lend some credence to an eventual attack on the dollar as the WRC. If the dollar is dethroned, a shooting war probably would not even be needed. Like all world reserve currencies in past history, it will eventually get knocked down. The industrial overcapacity is going to bite hard & affect everybody. Unfortunately, war is a likely outcome.

Next month, my opinions could be different ;-)

Jonathan

May 13, 2016 at 9:44 pm

Yes, our global economy is too interdependent from every angle for its own good, and there are crazy people who thinks this is an ideal state of affairs to be in.

Adam Price

May 14, 2016 at 3:49 pm

Nope. If access to the US markets were to be cut off due to any bellicosity from China, the entire economy of China would nearly immediately collapse. Helllllllllllllloooooo?

Curious Cat

May 13, 2016 at 11:15 pm

It has been said that warfare is a good way for countries to handle otherwise unsustainable debt. When the public thinks the homeland is about to be annihilated they are all too happy to approve the tax increases “needed” to save it. And of course those taxes seldom disappear.

I agree with the comments on inter-connectivity, but when economics pushes politicians’ backs to the wall they will do what is necessary to save their bacon, caring little about longer range effects and the general public welfare.

Can’t help but wonder how it’s all gonna turn out but I suspect the chances of significant warfare are a lot higher than before the “great recession”.

Kenny Lee

May 13, 2016 at 11:17 pm

You win wars with the army. The Chinese and Russians aren’t dumb enough to engage in a naval based war with the US. A navy needs to come back to port sometime.

Agnes

May 14, 2016 at 1:16 am

Ok this may seem off topic…but i distinctly remember VW “selling cars in China that did not have good smog controls”…maybe (since they just admitted their cars emit more smog than they had said)…just maybe…the cars were the same and the Chinese cars were better tested. :)

Agnes

May 14, 2016 at 1:33 am

Go/Baduk/Weqi/Igo is not like Chess. In Chess there is a total loser and a total winner. In Go, each side gets some surrounded territory. Strategy and tactics are greatly different between the two games also. In particular, if there is an invading piece that is unsupported, One Does Not Touch It. So the Chinese have not touched Taiwan. Because having a ponnuki off their coast is the last thing they want(it is a losing move). What is proper is to build up around the invader(building on the reefs makes me think of this). And most particularly, one does not pounce on the invader too soon as that can lead to a situation called “seki”. In seki no one gets the points and there is an area that neither can touch without causing the other to win(like certain topics in marriage). To the Chinese….they would expect us to be strongly supporting the Phillipines and making them fully self-supporting and strong and independent….because in Go weak groups are a liability. Boots on the ground observation…I went to the ROTC and offered to teach them Go. They scorned me :)

Pete Franklin

May 14, 2016 at 5:30 am

The NDRC and CAAM recommendations are ignorant of the problem. It’s all about overcapacity, not selling more cars and trucks. Most of the urban cities are already at the 24-30 cars/100 residents threshold limit of severe congestion and max car ownership. I.e., people who have wanted cars have now bought them. Visit any big city, the traffic is horrendous. The replacement and trade-in market is not yet there. There is some movement of owners switching from cheap cars to higher end models, but is doesn’t have a material impact on the industry.

The commercial vehicle market has been in a slump for over 5 years. The significant slowdown in China’s exports is an obvious root cause, in addition to the overall slowing down of the domestic economy. The other major factor in the truck and bus business is the chaotic and congested logistics system in China. You can only put so many trucks on the road.

Overcapacity is the number one problem. Dumb central planning policies to prop up dumb state owned enterprises.

Chicken

May 15, 2016 at 12:23 am

What happens when the wheels fall off of thirty one million Chinese vehicles?

One hundred and twenty million Americans are watching with their two hundred and forty million blue eyes.

randombypasser

May 15, 2016 at 3:59 am

Back in early 2000’s at the verge of the Crash Finnish company Metso Corp. won a deal to build couple paper mills to China. It was very profitable deal and also a nice chance to get some footing on Chinese markets.

But there was a some odd clauses in the deal. The paper mills were not to be just delivered production ready, with training included of course as with typical deals, but they were to built with the customer. There was strict clause to involve x amount of customers technical personnel in every phase of production. With full access to all technical data etc…

Of course it was widely known why there were such clauses and afterwards Metso quickly made some changes in it’s paper mill product line. It was less than one year when some Chinese competitor published technically very similar paper line that was delivered by Metso but by that time it was already old technology.

In Metso they knew very well how to get the deal and what that meant but they also understood the Chinese competition ideology and how to respond to it.

The asymmetry between status of manufacturers and users is pretty obvious:

“The (car) industry has become a huge contributor to the Chinese economy, not only in manufacturing, but also investment (building and equipping plants, dealerships, distribution infrastructure, etc.), services such as finance and insurance, transportation (hauling 24.6 million vehicles across China), etc. It’s for this reason that the industry is sacred.”

Ditto USA and EU (and Japan and Korea, too.) Plants, dealerships, infrastructure finance, transport, etc. provide returns for their investors. At the same time, ownership is 100% non-remunerative for the vast majority (95%) of drivers. The car cannot be paid for by driving it. Owners must borrow, directly or indirectly by way of their employers, in order to enjoy their metal-and plastic toys.

The outcome is steady unraveling of the industrial economy from the edges toward the center, like a string being pulled from a sweater. With the passage of time since 1950, the sweater bottom has retreated to the wearer’s armpits.

Armpits: Venezuela, Greece, Italy, fly-over USA … now China. Mobility is ‘fun’ but it turns out to be unaffordably expensive.

d

May 15, 2016 at 2:19 pm

the car replaced the horse.

The horse is what made us modern humans.

The same people who had to have The best fastest horses now buy the stupid Ferrari Etc.

Wheel Wrights, once commanded exorbitant wages.

Is a big employer as an industry so important until they perfect the hover-board or the teleported or the // thing.

its not as vital as you suggest

Agnes

May 15, 2016 at 10:23 pm

Hiya d….Its the distance to employment…45 minutes or less…ok….an hour or more and people move, if they can.